ESTATE A G BOURKE v COMMISSIONER FOR INLAND REVENUE
53 SATC 86
Division:
Judges:
Date:
Also cited as:
Appellate
HOEXTER JA, BOTHA JA, NESTADT JA, GOLDSTONE JA AND PREISS AJA
1, 30 November 1990
1991 (1) SA 661(A)
Income tax – Income or capital accrual – Taxpayer receiving compensation for destruction of pine trees in
plantation caused by fire – Whether accrual received as compensation was receipt of capital or revenue
nature – Pine trees, upon being felled, do not grow again – Contract providing upon felling of pine trees for
sale of yield of pine sawlogs to a sawmill – Distinction between ‘fixed’ and ‘floating’ (or ‘circulating’)
capital – Distinction not drawn in Income Tax Act 58 of 1962 but has, however, become entrenched in tax
law – Aspects of distinction drawn between two categories of capital stressed – Cases occur in which line of
demarcation between fixed and floating capital somewhat blurred and difficult to draw with precision –
Determining factor must be the nature of the trade in which the asset is employed – Inquiry relates
exclusively to the nature of the business carried on by the trust and the syndicate in relation to such pine
trees – Fact that, prior to severance from the soil, pine trees adhered to property and were converted into
income only after they had been felled entirely irrelevant circumstance – Pine trees on property representing
a trading asset of the trust and syndicate no less before they were felled than after they were felled – Pine
trees, before felling, clearly constituted floating capital – Pine trees the crop and income-producing
structure here the soil of the property on which pine trees stood – What was destroyed was the crop – No
sterilisation of the capital asset, the property, which could forthwith have been replanted to pine trees to
produce further ‘crops’ or ‘fruits’ – Finding of Special Court that compensation for loss of the pine trees not
a receipt of a capital nature confirmed – When guidance is sought from judicial utterances in earlier decided
cases their true significance and their value in solving the matter under consideration has to be assessed
with careful regard to the particular issue involved in the earlier case and the precise scope of the inquiry
upon which in such earlier case the court has embarked – Dicta wrested from a completely alien context are
unhelpful and may be misleading.
Appellants in this appeal were the executors in the estate of the late Mrs A G Bourke (‘the taxpayer’). The taxpayer was
a widow resident in Cape Town. She derived income from investments, rentals and certain farming interests.
Mr B J Bourke (‘Bourke’) was at one time the owner of seven Lowveld farm (‘the property’) in the district of Nelspruit,
Transvaal. Bourke leased three of the farms forming part of the property to the members of the Mayo Timber Syndicate
(‘the syndicate’). It would appear that at some time after January 1971 the ownership of the property was transferred
from Bourke to the Bernard Bourke Trust (‘the trust’). For some years before 1979 the trust and the syndicate had
carried on the business of
Page 87 of 53 SATC 86
timber plantation growers on the property. The plantations consisted of pine trees and gum trees. They also farmed with
fruit trees on the property. The aforesaid business was carried on by the syndicate on the three farms of which it was the
lessee, and by the trust on the balance of the property.
The taxpayer was the beneficiary of one-half of the trust. In turn the trust held a one-seventh share in the syndicate. In
her own right, furthermore, the taxpayer held a one-seventh share in the syndicate.
Adjoining the property was a farm (‘the neighbouring farm’) owned by the company H L Hall and Sons Ltd (‘Hall’).
On 26 June 1979 a fire started on the neighbouring farm. It spread to the property where it destroyed many trees. As
compensation for the destruction of the trees Hall paid the trust and the syndicate two amounts totalling almost
R336 000. By virtue of her interests in the trust and the syndicate the taxpayer received a share of the compensation so
paid.
It was common cause that if the compensation received by the trust and by the syndicate from Hall represented income
in their hands, then the accrual represented income in the hands of the taxpayer.
During the year of assessment ended on 28 February 1982, and in connection with her farming interests and by virtue of
her interests in the trust and the syndicate, and resulting from the fire described above, the taxpayer received by way of
compensation her share in the amount of R109 924 (‘the accrual’).
In a revised assessment dated 1 November 1984 the Commissioner included the accrual as part of the taxpayer’s taxable
income. On behalf of the taxpayer an objection was lodged with the Commissioner against the inclusion of the accrual
as part of the taxpayer’s taxable income. The Commissioner disallowed the objection.
In February 1985 the taxpayer appealed to the Cape Income Tax Special Court against the Commissioner’s
disallowance of her objection. The taxpayer died in March 1985 whereafter the appeal to the court below was pursued
by the appellants. This is an appeal in terms of s 86A(5) of the Income Tax Act 58 of 1962 against the decision of the
Cape Income Tax Special Court.
For purposes of the appeal to the Special Court there was prepared an ‘Agreed Statement of Facts and Issues’ (‘the
statement of facts’). In the statement of facts there was agreement as to the apportionment of the compensation between
the loss of pine trees, gum trees and avocado pear and pecan nut trees.
In the initial objection to the Commissioner’s revised assessment and in the appeal before the court below it was
contended on behalf of the taxpayer that no portion of the accrual was subject to tax since it was a receipt of a capital
nature.
It was not contended on behalf of the Commissioner that the present case was covered by any of the provisions set forth
in paras(a) to(n) of the definition of ‘gross income’ in s 1 of Act 58 of 1962.
In the statement of facts it was agreed that the amount of R3 211 in respect of the loss of the avocado pear trees and the
pecan nut trees was a receipt of a capital nature.
At the outset of the appeal in the court below a further concession was made on behalf of the Commissioner, namely,
that the compensation for the loss of the gum trees was likewise a receipt of a capital nature.
Accordingly the only issue which remained for decision in the court below was whether the
Page 88 of 53 SATC 86
amounts received by the trust and the syndicate for the loss of the pine trees were receipts of a capital nature within the
meaning of ‘gross income’ in s 1 of the Act.
In terms of s 82 of the Act the burden of proof that such compensation was a receipt of a capital nature rested upon the
taxpayer. The court below (per Berman J) came to the conclusion that the compensation for the loss of the pine trees
could not be regarded as receipts of a capital nature. The outcome was – to quote from the judgment of the learned
President (Berman J) in the court below:
‘. . . that save insofar as the gum trees are concerned (where the appeal was conceded by the Commissioner at the
commencement of the hearing) the appeal, which was confined to the question of the pine trees, is dismissed.’
It appeared from the evidence before the Special Court that the kind of pine trees destroyed in the fire did not grow
again after they had been felled.
At the date when the fire destroyed trees on the property there existed and there was being duly performed a written
agreement (‘the contract’) between the trust and the syndicate as sellers and a company known as Densa Sawmill(Pty)
Ltd as buyer, which related to the sale of the yield of pine sawlogs on the property, after the felling of the pine trees and
after the sawlogs had been divided into certain classes according to specified criteria. In terms thereof the trust and the
syndicate agreed to sell to Densa the total yield of pine sawlogs (as specified in the contract) ‘which shall be produced
on a sustained basis’ from the forestry activities of the trust and the syndicate on the property.
In both courts appellants argued that in respect of the pine trees lost in the fire the compensation received by the trust
and the syndicate was a receipt of a capital nature and therefore not subject to tax. They contended that in terms of the
contract the trust and the syndicate would have received income from the pine trees destroyed in the fire only after they
had been felled; before actual felling the pine trees standing on the property were an integral part of the incomeproducing structure of the trust and the syndicate.
In the court below the Commissioner’s representative countered the above argument by contending that the pine trees
simply represented a crop produced by, but separate from, the income-producing structure of the timber growers; such
structure consisted of the ground on which the pine trees grew.
The distinction between ‘fixed’ and ‘floating’ (or ‘circulating’) capital which is so frequent a topic of discussion in tax
cases, is not a distinction drawn in the Act, or its predecessor, and the same position applies in the Companies Acts of
the United Kingdom. It is a distinction derived from writers on political economy. The distinction has, however,
become entrenched in tax law. Having regard to the issue which arises in the present appeal, ie, whether an accrual is a
capital accrual or is income, certain aspects of the distinction between the two categories of capital thus recognised in
2
tax law should be stressed at the outset. The first is that the labelling of capital in either category at a given time and in a
particular situation does not impart any ingrained character, incapable of fluctuation, to the capital involved. The
mutability of the nature of capital was neatly put in the English case of Ammonia Soda Company Ltd v Chamberlain
[1918] 1 Ch 266(CA) in the following words: ‘It must not, however, be assumed that the division into which capital
thus falls is permanent. The language is merely used to describe the purpose to which it is for the time being
appropriated.’ Second, what must be steadily borne in mind is that the assignment of capital to the one or other category
‘. . . depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be
circulating capital. A chattel or a chose in action may be fixed capital. The determining factor must be the nature of the
trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed
capital. The land with which a dealer in real estate carries on his business is part of his circulating capital.’ (Golden
Horse Shoe(New), Limited v Thurgood (HM Inspector
Page 89 of 53 SATC 86
of Taxes) [1934] 1 KB 548(CA) at 563.) Cases not infrequently occur in which the facts are such that the line of
demarcation between fixed and floating capital is somewhat blurred and difficult to draw with precision .
Held
(i)
That the question whether an accrual is to be categorised as capital or income falls to be decided on the
facts of each particular case.
(ii) That the inquiry in the present case relates not to the legal status, in the law of things, of the crop on
the property but exclusively to the nature of the business carried on by the trust and the syndicate in
relation to such pine trees; the trust and the syndicate farmed with the pine trees in order to derive
income therefrom.
(iii) That in determining whether the compensation paid for the loss of the pine trees was income or
capital, the feature of the case that prior to severance from the soil the pine trees adhered to the
property and that the pine trees were converted into income only after they had been felled was an
entirely irrelevant circumstance.
(iv) That it was clear that the pine trees on the property represented a trading asset of the trust and the
syndicate no less before they were felled than after they were felled and delivered to the sawmill as
sawlogs.
(v) That it was unnecessary to look beyond the fact that, having regard to the essential nature of the
business of the trust and the syndicate, the pine trees on the property constituted trading stock as
defined in s 1 of Act 58 of 1962.
(vi) That the pine trees, even before felling, clearly constituted floating capital in the business.
(vii) That the distinction between trees which are sylva caedua and those which are not is irrelevant in the
present inquiry.
(viii) That the loss of the pine trees was akin to the loss of the apples from an apple tree rather than to the
loss of the apple tree itself.
(ix) That in the case of an apple orchard the income-producing structure had a dual component: the soil on
which the apple trees stood and the apple trees from whose branches the apples hung; the crop was the
apples which are picked.
(x) That in the present case the crop was the pine trees; the income-producing structure was here the soil
of the property on which the pine trees stood; what was destroyed was simply the crop; there was no
sterilisation of the capital asset, the property, which could forthwith have been replanted to pine trees
to produce further ‘crops’ or ‘fruits’.
(xi) That when guidance is sought from judicial utterances in earlier decided cases their true significance
and their value in solving the matter under consideration has to be assessed with a careful regard to the
particular issue involved in the earlier case; and the precise scope of the inquiry upon which in such
earlier case the court had embarked; dicta wrested from a completely alien context are unhelpful and
may be misleading.
(xii) That the decision of the Special Court that compensation for loss of the pine trees was not a receipt of
a capital nature was confirmed.
Appeal dismissed with costs, such costs to include the costs of two counsel.
A P Blignault SC for the appellant referred to the following authorities: Silke on South African Income Tax
10 ed para 3.23; Taeuber & Corssen(Pty) Ltd v Secretary for Inland Revenue 1975(3) SA 649(A), 37 SATC
129; Commissioner for Inland Revenue v Illovo Sugar Estates Ltd 1951(1) SA 306(N) at 310-11, 17 SATC
3
387; The Glenboig Union Fireclay Co Ltd v Commissioners of Revenue 12 TC 427; Commissioner for
Inland Revenue v George Forest Timber Co Ltd
Page 90 of 53 SATC 86
1924 AD 516, 1 SATC 20; Crowe v Commissioner for Inland Revenue 1930 AD 122, 4 SATC 133; Baikie v
Commissioner for Inland Revenue 1931 AD 496, 5 SATC 193; Kauri Timber Co v Commissioner of Taxes
1913 AC 771; ITC 596 14 SATC 261; Digest 7.1.10 & 11 read with 50.16.30; Voet 7.1.22; Van Leeuwen
Censura Forensis 1.2.15.9; Van der Keessel Praelectiones ad Grotius 2.39.7; Houghton Estate Co v McHattie
& Barnett 1894 OR 92.
M Seligson SC (with him L S Kuschke) for the respondent referred to the following authorities:
Commissioner for Inland Revenue v George Forest Timber Co Ltd 1924 AD 516, 1 SATC 20; Crowe v
Commissioner for Inland Revenue 1930 AD 122, 4 SATC 133; Baikie v Commissioner for Inland Revenue
1931 AD 496, 5 SATC 193; ITC 596, 14 SATC 261; Lee & Honoré Family Things and Succession; New
State Areas Ltd v Commissioner for Inland Revenue 1946 AD 610, 14 SATC 155; Sekretaris van
Binnelandse Inkomste v Aveling 1978(1) SA 862(A), 40 SATC 1; Bloch v Secretary for Inland Revenue
1980(2) SA 401(C), 42 SATC 7; Commissioner for Inland Revenue v TOD 1983(2) SA 364(N), 45 SATC 1;
Meyerowitz & Spiro Income Tax in South Africa; Natal Estates Ltd v Secretary for Inland Revenue 1975(4)
SA 177(A), 37 SATC 193; Elandsheuwel Farming(Edms) Bpk v Secretary for Inland Revenue 1978(1) SA
101(A), 39 SATC 163; Secretary for Inland Revenue v Cadac Engineering Works(Pty) Ltd 1965(2) SA
511(A), 27 SATC 61; Sub-Nigel Ltd v Commissioner for Inland Revenue 1948(4) SA 580(A), 15 SATC
381; Commissioner for Inland Revenue v African Oxygen Ltd 1963(1) SA 681(A), 25 SATC 67; ITC 3, 1
SATC 50; ITC 312, 8 SATC 154; ITC 1279, 40 SATC 254; Geldenhuys v Commissioner for Inland Revenue
1947(3) SA 256(C), 14 SATC 419; Commissioner for Inland Revenue v Illovo Sugar Estates Ltd 1951(1) SA
306(N), 17 SATC 387; Glenboig Union Fire Clay Co v Commissioner for Inland Revenue 12 SATC 427;
Stone v Commissioner for Inland Revenue 1974(3) SA 584(A), 36 SATC 117; Matla Coal Ltd v
Commissioner for Inland Revenue 1987(1) SA 108(A), 48 SATC 223; ITC 835, 21 SATC 238; ITC 782, 19
SATC 410.
Cur adv vult.
Postea (30 November).
HOEXTER JA: This is an appeal, in terms of s 86A(5) of the Income Tax Act 58 of 1962 (‘the Act’) against
a decision of the Cape Income Tax Special Court. The late Mrs A G Bourke (‘the taxpayer’) was a widow
resident in Cape Town. She derived income from investments, rentals and certain farming interests. The
appellants in this appeal are the executors in the taxpayer’s estate. The respondent is the Commissioner for
Inland Revenue (‘the commissioner’).
During the year of assessment ended on 28 February 1982, and in connection with her farming interests, the
taxpayer received by way of compensation an amount of R109 924 (‘the accrual’). The events leading up to
the accrual will be mentioned later in this judgment. In a
Page 91 of 53 SATC 86
revised assessment dated 1 November 1984 the commissioner included the accrual as part of the taxpayer’s
taxable income. On behalf of the taxpayer an objection was lodged with the commissioner against the
inclusion of the accrual as part of the taxpayer’s taxable income. The commissioner disallowed the objection.
In February 1985 the taxpayer appealed to the court below against the commissioner’s disallowance of her
objection. The taxpayer died in March 1985, whereafter the appeal to the court below was pursued by the
appellants.
For purposes of the appeal to the special court there was prepared an ‘Agreed Statement of Facts and Issues’
to which reference will hereafter be made as ‘the statement of facts’. At the end of argument in the court
below only one issue fell to be decided. That issue was decided against the taxpayer. Hence the present
appeal.
4
The essential facts fall within a small compass. Mr Bernard John Bourke (‘Bourke’) was at one time the
owner of seven Lowveld farms (‘the property’) in the district of Nelspruit, Transvaal. Bourke leased three of
the farms forming part of the property to the members of the Mayo Timber Syndicate (‘the syndicate’). It
would appear that at some time after January 1971 the ownership of the property was transferred from
Bourke to the Bernard Bourke Trust (‘the trust’). For some years before 1979 the trust and the syndicate had
carried on the business of timber plantation growers on the property. The plantations consisted of pine trees
and gum trees. They also farmed with fruit trees on the property. The aforesaid business was carried on by
the syndicate on the three farms of which it was the lessee, and by the trust on the balance of the property.
The taxpayer was the beneficiary of one-half of the trust. In turn the trust held a one-seventh share in the
syndicate. In her own right, furthermore, the taxpayer held a one-seventh share in the syndicate.
Adjoining the property was a farm (‘the neighbouring farm’) owned by the company H L Hall and Sons Ltd
(‘Hall’). On 26 June 1979 a fire started on the neighbouring farm. It spread to the property where it destroyed
many trees. As compensation for the destruction of the trees Hall paid the trust and the syndicate two
amounts totalling almost R336 000. By virtue of her interests in the trust and the syndicate the taxpayer
received a share of the compensation so paid. It is common cause that if the compensation received by the
trust and by the syndicate from Hall represented income in their hands, then the accrual represented income
in the hands of the taxpayer.
In para 9 of the statement of facts it was agreed that –
‘. . . the total amount of compensation received by the appellant’ (the taxpayer) ‘can be apportioned as
follows:
(a)
(b)
(c)
For the loss of pine trees
For the loss of gum trees
For the loss of avocado pear and pecan nut trees
R102 553
R 4 160
R 3 211
R109 924’
In the initial objection to the commissioner’s revised assessment and in the appeal before the court below it
was contended on behalf of the taxpayer that no portion of the accrual was subject to tax since it was a
receipt of a capital nature. In s 1 of the Act the definition of ‘gross income’ reads as follows:
‘ “gross income”, in relation to any year or period of assessment, means, in the case of any
Page 92 of 53 SATC 86
person, the total amount, in cash or otherwise, received by or accrued to or in favour of such person during
such year or period of assessment from a source within or deemed to be within the Republic, excluding
receipts or accruals of a capital nature, but including, without in any way limiting the scope of this definition,
such amounts (whether of a capital nature or not) so received or accrued as are described hereunder, namely:
. . .’
(Paras (a) to(n) of the definition then follow). It was not contended on behalf of the commissioner that the
present case is covered by any of the provisions set forth in paras(a) to(n) of the definition.
In para 10 of the statement of facts it was agreed –
‘. . . that the amount of R3 211 in respect of the loss of the avocado pear trees and the pecan nut trees was a
receipt of a capital nature.’
At the outset of the appeal in the court below a further concession was made on behalf of the commissioner,
namely, that the compensation for the loss of the gum trees was likewise a receipt of a capital nature. The
propriety or otherwise of the last-mentioned concession is not an issue in the appeal before this court.
5
Accordingly the only issue which remained for decision in the court below was whether the amounts
received by the trust and the syndicate for the loss of the pine trees were receipts of a capital nature within
the meaning of ‘gross income’ in s 1 of the Act. In terms of s 82 of the Act the burden of proof that such
compensation was a receipt of a capital nature rested upon the taxpayer. The court below came to the
conclusion that the compensation for the loss of the pine trees could not be regarded as receipts of a capital
nature. The outcome was – to quote from the judgment of the learned President (Berman J) in the court
below:
‘. . . that save insofar as the gum trees are concerned (where the appeal was conceded by the Commissioner
at the commencement of the hearing) the appeal, which was confined to the question of the pine trees, is
dismissed.’
At the date when the fire destroyed trees on the property there existed and there was being duly performed a
written agreement (‘the contract’) between the trust and the syndicate as sellers and a company known as
Densa Sawmill(Pty) Ltd as (‘Densa’) as buyer. The contract, which had been concluded in January 1971,
related to the sale of the yield of pine sawlogs on the property. The full terms of the contract need not here be
stated. Suffice it to say that in terms thereof:
(1)
(2)
(3)
the trust and the syndicate agreed to sell to Densa the total yield of pine sawlogs (as specified in the
contract) ‘which shall be produced on a sustained basis’ from the forestry activities of the trust and the
syndicate on the property;
the pine sawlogs aforesaid were divided into certain classes according to age, diameter and length, and
the prices of the various log classes were defined;
the sellers would deliver the pine sawlogs to the buyer at the plantation road and payment therefor
would be made by Densa within thirty days of the date appearing on the monthly statements submitted
by the sellers to the buyer.
Both in the court below and in this court the appeal was argued on behalf of the appellants by Mr Blignault.
In both courts he advanced substantially the same argument in support of his submission that in
Page 93 of 53 SATC 86
respect of the pine trees lost in the fire the compensation received by the trust and the syndicate was a receipt
of a capital nature and therefore not subject to tax. Starting with the well-established principle that money
received by a taxpayer as compensation for the loss of what is ‘an income-producing structure’ is a receipt of
a capital nature, the kernel of the argument of counsel for the appellants came to the following: In terms of
the contract the trust and the syndicate would have received income from the pine trees destroyed in the fire
only after they had been felled; before actual felling the pine trees standing on the property were an integral
part of the income-producing structure of the trust and the syndicate.
In the court below the commissioner’s representative countered the above argument by contending that the
pine trees simply represented a crop produced by, but separate from, the income-producing structure of the
timber growers; such structure consisted of the ground on which the pine trees grew.
The special court rejected the appellants’ contention. In the course of his judgment the learned President
remarked as follows:
‘A pine tree does not fall within the category of sylva caedua in that, as pointed out earlier, it does not, upon
being felled, grow again. The loss of the pine trees as a result of the fire is to be equated with the loss of the
actual peaches or apples of the fruit-farmer, and not with the loss of the peach trees or apple trees
themselves. The pine tree is the fructus of the land, as the fruit is that of the fruit tree, cf ITC 596, 14 SATC
261. There can be no difference between the case where fruit is destroyed whilst unpicked and that where it
has already been picked and packed, and the fact that in the instant case the pine trees were still standing and
had not yet been felled and delivered to Densa . . . cannot alter their “status”. The pine trees destroyed by the
fire, standing and unfelled, did not form part of the income-producing machines of the Trust and the
Syndicate, as did the other varieties of trees destroyed in the same fire, for these other varieties of trees were,
for want of a better word, self-replenishing; had they not been destroyed they would have continued to yield
crops and they thus constituted “income-producing machines”. On the other hand by no stretch of the
imagination can pine trees be so described for they did not constitute, when standing, “income-producing
6
machines” manufacturing or producing goods (or fruit); they constitute themselves the fruit of the land,
whether standing thereon or in the form of logs.’
The phrase ‘receipts or accruals of a capital nature’ which occurs in the definition of ‘gross income’ already
quoted is not defined elsewhere in the Act; and, understandably perhaps, the courts have not yet attempted
any exhaustive definition of it. The question whether an accrual is to be categorised as capital or income falls
to be decided on the facts of each particular case.
When the receipt in question represents compensation to the taxpayer, a test which is sometimes applied is to
ask the question whether the compensation was designed to fill a hole in the taxpayer’s profits, or whether it
was intended to fill a hole in his assets. Cf Burmah Steam Ship Co Ltd v CIR, 16 TC 67. However, as
pointed out by Broomberg, Tax Strategy, 2ed(1983) at 199-200, the fact that what is plugged is a hole in
assets, does not by itself, conclude the inquiry –
‘Of course, it is not sufficient to establish that the compensation is being paid in order to fill a hole in the
taxpayer’s assets. It is necessary, in addition, to ascertain the true nature of that asset in the recipient’s hands.
More particularly, was the asset, prior to its destruction or damage, an asset of a capital nature or was it
floating capital? If it was floating capital, such as trading stock, standing crops, or consumable stores (like
petrol, oil and so forth) the compensation will, obviously, be of a revenue nature, and will be subject
Page 94 of 53 SATC 86
to tax. In short, it is only where the payment received is to fill a hole in the capital assets of the taxpayer that
the payment will escape the tax net.’
In the context of the present case it is useful to remember that in s 1 of the Act ‘trading stock’ is widely
defined as including –
‘. . . anything produced, manufactured, purchased or in any other manner acquired by a taxpayer for purposes
of manufacture, sale or exchange by him or on his behalf, or the proceeds from the disposal of which forms
or will form part of his gross income.’
The distinction between ‘fixed’ and ‘floating’ (or ‘circulating’) capital which is so frequent a topic of
discussion in tax cases, is not a distinction drawn in the Act, or its predecessor, and the same position applies
in the Companies Acts of the United Kingdom. See: Ammonia Soda Company Ltd v Chamberlain [1918] 1
Ch 266(CA) at 286. It is a distinction derived from writers on political economy. The distinction has,
however, become entrenched in tax law, and its essence is described thus by Rabie JA in Sekretaris van
Binnelandse Inkomste v Aveling 1978(1) SA 862(A) at 880E-F:59
‘Soos blyk uit die aanhaling hierbo (Commissioner for Inland Revenue v George Forest Timber Co Ltd 1924
AD 516 at 524)60 het ’n mens in die geval van vaste kapitaal ’n element van permanentheid, in die sin dat
daar ’n bedoeling is om die betrokke bate min of meer permanent te hou met die doel dat dit inkomste moet
voortbring. Kenmerkend van bedryfskapitaal daarenteen is ’n bedoeling om die betrokke bate voortdurend in
kontant of ander goed om te sit.’
Having regard to the crisp issue which arises in the present appeal, certain aspects of the distinction between
the two categories of capital thus recognised in tax law should, I think, be stressed at the outset. The first is
this. The labelling of capital in either category at a given time and in a particular situation does not impart
any ingrained character, incapable of fluctuation, to the capital involved. The mutability of the nature of
capital is neatly put by Swinfen Eady J in the Ammonia case supra at 287 in the following words:
‘It must not, however, be assumed that the division into which capital thus falls is permanent. The language
is merely used to describe the purpose to which it is for the time being appropriated.’
Second, what must be steadily borne in mind is that the assignment of capital to the one or other category –
‘. . . depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain
circumstances be circulating capital. A chattel or a chose in action may be fixed capital. The determining
7
factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer
carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his
business is part of his circulating capital.’
(per Romer LJ in Golden Horse Shoe(New), Limited v Thurgood (H M Inspector of Taxes) [1934] 1 KB
548(CA) at 563.)
Cases not infrequently occur in which the facts are such that the line of demarcation between fixed and
floating capital is somewhat blurred and difficult to draw with precision. I do not think that the facts of the
present case present any real difficulty. The argument for the appellants focuses in the main on the legal
nature of the asset for which compensation was paid (the pine trees standing on the property and, prior to
felling,
Page 95 of 53 SATC 86
adhering thereto). Now it is trite that the planting of land and the taking root thereon of trees provides an
example of industrial accession. The trees are incorporated into the soil which nurtures them. But here the
inquiry relates not to the legal status, in the law of things, of the crop on the property but exclusively to the
nature of the business carried on by the trust and the syndicate in relation to such pine trees. The trust and the
syndicate farmed with the pine trees in order to derive income therefrom.
In determining whether the compensation paid for the loss of the pine trees is income or capital, the feature
of the case that prior to severance from the soil the pine trees adhered to the property and that the pine trees
were converted into income only after they had been felled is an entirely irrelevant circumstance. It is clear,
in my opinion, that the pine trees on the property represented a trading asset of the trust and the syndicate no
less before they were felled than after they were felled and delivered to Densa as sawlogs. Mr Seligson, who,
with Mr Kuschke, argued the appeal for the commissioner in this court, submitted that the conclusion just
stated was reinforced by the consideration that in terms of the contract the entire yield of logs from the pine
trees was ‘pre-sold’ to Densa. It seems to me, with respect, that the pre-sale does not really advance the case
for the commissioner. It is unnecessary, I think, to look beyond the fact that having regard to the essential
nature of the business of the trust and the syndicate the pine trees on the property constituted trading stock as
defined in s 1 of the Act. On the grounds undermentioned I am unable to agree with some of the reasoning
which impelled the special court to conclude that the pine trees standing on the property formed no part of
the ‘income-producing structure’ of the trust and the syndicate; but in my respectful view the result at which
the special court arrived was correct. In my opinion the pine trees, even before felling, clearly constituted
floating capital in the business.
As appears from that portion of its judgment already quoted, the special court appeared to regard as
significant the fact that a pine tree does not fall within the category of sylva caedua. In argument before us
counsel on both sides were agreed, correctly I think, at least in regard to one matter: that the arboricultural
distinction between trees which are sylva caedua and those which are not, is unhelpful to a determination of
the appeal. It is true that in ITC 596 14 SATC 261, to which the judgment of the court below makes
reference in this connection, one ground upon which the appeal succeeded was that since pine trees are not
sylva caedua their proceeds could not be regarded as fructus of the land. In passing I would mention that in
the context of cases such as the present one use of the word ‘fruits’ or ‘crops’ is to be preferred to the word
‘fructus’ because the latter sometimes carries technical overtones, and in its widest acceptation signifies the
equivalent of any enjoyment or pecuniary advantage. See Goudsmit Pandects(1873) (Gould’s translation, at
110 note 5). However that may be, the distinction between trees which are sylva caedua and those which are
not, appears to me to be irrelevant to the matter in issue. As examples of fructus naturales brought forth from
nature from a fruit-bearing thing, Lee & Honoré, Family, Things and Succession, 2ed para 228 (at 234)
include also –
Page 96 of 53 SATC 86
‘. . . trees grown to provide firewood or timber . . . irrespective of whether they have the quality of
renascentia ie whether they sprout again when cut down as in the case of gum trees, or not.’
I agree, further, with the submission of Mr Seligson that the ratio for the finding in ITC 596 supra was
directly related to the question whether the taxpayer in that case had engaged in the business of cutting the
8
timber and selling the product. In the result the President (Ingram KC) found that the appellant company had
not engaged in such business; and at 262 that the sale of the timber in question was simply the realisation of
part of an asset and its conversion into cash.
Returning to the judgment of the special court in the instant case, I respectfully agree with the view therein
expressed that the loss of the pine trees is akin to the loss of the apples from an apple tree rather than to the
loss of the apple tree itself. In the case of an apple orchard the income-producing structure has a dual
component: the soil on which the apple trees stand and the apple trees from whose branches the apples hang.
The crop is the apples which are picked. In the present case the crop is the pine trees. The income-producing
structure was here the soil of the property on which the pine trees stood. What was destroyed was simply the
crop. There was no sterilisation of the capital asset, the property, which could forthwith have been replanted
to pine trees to produce further ‘crops’ or ‘fruits’.
For the sake of completeness it is necessary to deal briefly with a trilogy of decisions in this court from
which Mr Blignault extracted various dicta which, so it was urged, were destructive of the commissioner’s
argument that the compensation paid for the loss of the pine trees represented income. The three decisions
are respectively Commissioner for Inland Revenue v George Forest Timber Co Ltd 1924 AD 51661 (‘the
George Forest case’); Crowe v Commissioner for Inland Revenue 1930 AD 12262 (‘the Crowe case’); and
Baikie v Commissioner for Inland Revenue 1931 AD 49663 (‘the Baikie case’).
In the George Forest case the decision of this court was unanimous, but separate judgments were delivered
by Innes CJ and De Villiers JA. In the course of his judgment at 52364 the learned Chief Justice sounded a
warning which has been echoed in many subsequent tax decisions:
‘It is dangerous in income tax cases to depart from the actual facts; the true course is to take the facts as they
stand and apply the provisions of the statute.’
Having regard to the thrust of the appellants’ argument in the present appeal another cautionary precept
might not be out of place. When guidance is sought from judicial utterances in earlier decided cases their true
significance and their value in solving the matter under consideration has to be assessed with a careful regard
to the particular issue involved in the earlier case; and the precise scope of the inquiry upon which in such
earlier case the court had embarked. Dicta wrested from a completely alien context are unhelpful and may be
misleading.
Page 97 of 53 SATC 86
In the George Forest case the taxpayer was a company which carried on business as timber merchants and
sawyers. For the purpose of its business it acquired six hundred morgen of natural forest. For practical
purposes the value of the land without the forest was negligible. The company annually felled a quantity of
timber. This was sawn up in its mill and sold as part of its trading stock. In the calculation of its taxable
income the company claimed to deduct a sum representing the proportion of the cost of the forest relative to
the timber felled in that year. This court held that the total amount received from the sale of stock-in-trade in
the course of the business of the company fell within the definition of ‘gross income’; that no part of its
receipts constituted receipts of a capital nature; and that no deduction was permissible from those receipts by
way of provisions for redemption of wasting capital. One of the issues which arose was whether the price
paid by the taxpayer for the afforested land represented expenditure ‘of a capital nature’ (see 525).65 In this
connection Mr Blignault called our attention to the following dicta in the George Forest case. At 52666 Innes
CJ observed:
‘No doubt the trees constituted the chief value of the property, and formed the inducement for its acquisition.
But the same might be said of the stone or the clay in land purchased for the purpose of a quarry or a
brickfield. They formed part of the realty to which they acceded, and they passed with it.
Now, money spent in creating or acquiring an income-producing concern must be capital expenditure. . . .’
And at 53067 De Villiers JA stated:
‘The land, with its accessories, forms a portion of the fixed capital of the company to be used in its business
for the purpose of producing income. The cost of such land, therefore, must be considered as an outgoing of
a capital nature, for it went to purchase property which was added to the fixed capital stock of the company.’
9
Having regard to the issues in the George Forest case the above-quoted dicta appear to me to have no
relevance whatever to the question whether in the instant case the pine trees standing on the property
represented the taxpayer’s floating capital and trading stock.
In Crowe’s case the taxpayer wished to buy a farm on which a mature wattle plantation already stood, but he
had insufficient money to pay the purchase price. Two companies, one of which dealt in wattle-bark and the
other in timber, were interested in securing the produce of the plantation but not in the purchase of the
property itself. With these two companies the taxpayer concluded agreements to buy the wattle-bark and the
timber for the eventuality that he should acquire the farm; and he also secured a contract for the felling and
stripping of the wattle trees at a remuneration. Armed with these contracts the taxpayer bought the farm and
proceeded to fell and strip the plantation, delivering the bark and timber to the companies which had bought
them. The proceeds so received for the bark and timber were paid immediately by the taxpayer to the seller
of the farm on account of the purchase price. By a majority decision this court held that, in the particular
circumstances of the case,
Page 98 of 53 SATC 86
the plantation had been sold as a portion of the capital asset acquired; and consequently that the amount
received by the taxpayer for the bark and timber was simply a realisation of portion of his capital, and not a
receipt on income account. It is unnecessary to expatiate further on the Crowe case. Suffice it to say that the
taxpayer did not buy and sell the plantation to make a profit. What he did was to buy an improved farm and
at the same time he sold the improvements to raise enough money to pay the purchase price of the farm. On
the view adopted by the majority, the position was the same as if the taxpayer had sold a portion of the farm
in advance in order to enable him to pay for the whole. Nothing said in the judgment of Stratford JA who
delivered the majority judgment in the Crowe case, remotely represents authority for the proposition that in
the present case the pine trees grown by the trust and the syndicate in order to derive income therefrom
represented fixed capital.
There is likewise a vast difference between the issue in the Baikie case and the issue in the present appeal.
The appellant, a wattle farmer, bought a farm for £13,750, the wattle plantation on the farm being valued for
the purposes of transfer duty at £3,470. During the following tax year the appellant sold bark and wood for a
sum of £6,687, which sum was included by the commissioner as part of the appellant’s income for that year.
The appellant having claimed without success to deduct the sum of £3,470 on the ground that this sum was
expenditure actually incurred in the production of income, and therefore not of a capital nature, this court in
dismissing the appellant’s appeal held that the expenditure was in the circumstances of a capital nature and
therefore not deductible under the Income Tax Act of 1925. The court held at 50068 that it was
impermissible ‘to divide the single purchase of the farm with all its accessories . . . into two purchases’ and
that the separation for the special purpose of transfer duty was irrelevant. Stratford JA who delivered the
judgment of the court, concluded by saying at 500:69
‘. . . it is impossible to accept the appellant’s argument that there was a separate – a floating capital –
expenditure on the plantation, and it is also impossible to distinguish the case before us from that of the
George Forest case.’
The inquiry in the Baikie case bears no resemblance to that in the instant case; and the ratio of the Baikie
case has no application here.
The appeal is dismissed with costs, such costs to include the costs of two counsel.
Botha JA, Nestadt JA, Goldstone JA and Preiss AJA concurred.
10